China's reserves rose at a record pace in the second quarter topping $2 trln. The rise in China's forex reserves may increase the risk of inflation. China added $178 bln in reserves during the second quarter. The rise in reserves suggests that "hot" money (speculative capital) is pouring into China as investors anticipate an economic rebound. The increase in reserves comes as China's economy is recovering, the money supply is rising and bank lending rose at a record pace in June. China's June M2 money supply growth rose 28.5%. The price of China's real estate and equities has risen sharply over the past few months. The rise in lending, money supply, equities and asset prices generate concern about the risk of inflation in China. In response to this risk, the Central Bank of China implemented a modest tightening of monetary policy Wednesday stating that the accommodative phase of monetary policy is over.
The Bank of Japan (BOJ) concluded a two-day monetary policy meeting Wednesday and elected to hold rate policy unchanged at 0.1%. The BOJ also reduced the expansion of its quantitative ease at today's policy meeting to three months from six months. The BOJ introduced an expansion of quantitative ease earlier in the year. The BOJ elected to increase purchases of corporate bonds and commercial paper to boost liquidity to combat the impact global financial crisis on Japans economy. The addition of liquidity by the BOJ is starting to have impact. The BOJ says that Japan's economy has stopped worsening. By reducing the timeframe for expansion of quantitative ease the BOJ appears concerned about the long term impact of expanding liquidity. The reduction in the time frame for the Bank of Japan's expansion of quantitative ease is a sign that the Bank of Japan is preparing for an eventual exit strategy from accommodative monetary policy. The BOJ forecasts a -1.3% core inflation rate for fiscal 2009. Infation is not a risk in Japan but as the Japanese and global economy recover, the BOJ will need to take back stimulus and exit quantitative ease. This is a modest positive for JPY.
Today's report of record rise in China's reserves and the actions taken by the Central Bank of China and Bank of Japan may have significant impact on global equity, commodity markets and the USD. The increase in China's reserves may be used to buy commodities. The reserves may also be diversified into non-USD denominated assets. This could fuel higher commodity prices and a weaker USD. The BOJ's decision to reduce the timeframe for quantitative ease is a signal that the Bank of Japan sees the global recession nearing an end. If this is the case, equity markets and commodity markets may continue their current rally supported by improving risk sentiment and optimism about the global economy. The commodity currencies may experience increased demand. The actions taken by the Bank of China and Bank of Japan suggest the risk of global deflation has been reduced by prior central bank actions to boost liquidity and governments to increase fiscal spending. Central bank officials in China and Japan are concerned about the impact of the stimulus plans. The central Bank of China's next policy move will be to tighten policy and the BOJ is setting the stage to exit quantitative ease.
Saturday, July 25, 2009
US (CPI)
US June Consumer Price Index (CPI) will be released on July 15th. The CPI is seen as the most important measure of inflation and measures the price level of goods and services purchased at the consumer level. CPI can be greatly influenced by movements in the volatile "food and energy component." Therefore it is important to look at the CPI excluding food and energy which is known as the "core rate" of inflation. The most closely watched components of the core rate are apparel, tobacco, airfares and new car sales. May CPI dropped 1.3%. This was the biggest annual CPI decline since 1950. Excluding food and energy, May core prices rose just 0.1% compared to a 0.3% rise in April. The decline in May CPI and the modest rise in the core rate suggest that inflation remains low and businesses are having difficulty passing on costs to consumers. Food prices fell 0.2% reflecting lower costs for meats, dairy products, fruits and vegetables. New car sales rose 0.5%. The core inflation rate was limited by weaker costs of apparel, tobacco, transportation and rents.
The June CPI is expected to rise 0.2% m/m compared to a seasonally adjusted 0.1% last month. June annual inflation rate is expected at -1.6% compared to -1.3% last month. Core inflation is expected at 0.2% compared to 0.1% last month. The trade will look to the June CPI report for signs of deflation or if the data suggests a rising risk of inflation. The report may have implications for Fed policy and whether the Fed has leeway to increase quantitative ease if inflation risk remains low. If the report shows increased inflation risk the report might encourage the Fed to consider moving up its timetable for an exit strategy from quantitative ease. The Fed has implemented quantitative ease and pledged to buy $1.75 trln in mortgage backed securities, Treasury notes and agency bonds to boost liquidity and combat the US recession. This large amount of liquidity may increase inflation risk as the Fed's balance sheet expands and the economy recovers. At some point the Fed will have to implement an exit strategy from quantitative ease to mop up this liquidity and reduce its balance sheet. The Fed may elect to execute reverse repurchase agreements, consider sales of short term debt to sterilize reserves or pay interest on the reserves as part of a plan to exit quantitative ease. Fed Chairman Bernanke testifies before Congress on July 21st. His testimony may include some details of the Fed's plans for an exit strategy from quantitative ease. The impact of the June CPI report should be limited unless there is a major divergence from market expectation in the core CPI.
The June CPI is expected to rise 0.2% m/m compared to a seasonally adjusted 0.1% last month. June annual inflation rate is expected at -1.6% compared to -1.3% last month. Core inflation is expected at 0.2% compared to 0.1% last month. The trade will look to the June CPI report for signs of deflation or if the data suggests a rising risk of inflation. The report may have implications for Fed policy and whether the Fed has leeway to increase quantitative ease if inflation risk remains low. If the report shows increased inflation risk the report might encourage the Fed to consider moving up its timetable for an exit strategy from quantitative ease. The Fed has implemented quantitative ease and pledged to buy $1.75 trln in mortgage backed securities, Treasury notes and agency bonds to boost liquidity and combat the US recession. This large amount of liquidity may increase inflation risk as the Fed's balance sheet expands and the economy recovers. At some point the Fed will have to implement an exit strategy from quantitative ease to mop up this liquidity and reduce its balance sheet. The Fed may elect to execute reverse repurchase agreements, consider sales of short term debt to sterilize reserves or pay interest on the reserves as part of a plan to exit quantitative ease. Fed Chairman Bernanke testifies before Congress on July 21st. His testimony may include some details of the Fed's plans for an exit strategy from quantitative ease. The impact of the June CPI report should be limited unless there is a major divergence from market expectation in the core CPI.
Forex news and Alerts for the coming month ending 31 july 2009
NON-FARM PAYROLL:
The Non Farm Payrolls is the most important employment indicator of the month, as it shows an indication of the employment rate and the overall strength of the labour market.
Last week's currency trading reviewThe Dollar was stronger against most currencies with the exception of the Yen with USD/JPY making a major move to the downside. The DOW fell 2.6% and Oil slid to the $60 level. ISM Non Manufacturing jumped to 47 vs. 44 previously and added to speculation that the confidence was improving. The G8 meeting took place but little new was announced. The demise of 'green shoots' rally was a major theme. July US Consumer Confidence also took a dip to 64.6 vs. 70.9 previously. The Euro fell but kept to a very pronounced range from 1.3850 to 1.4150. Reports that central banks were buying below and selling above help keep the range intact. German Industrial Production for May rose 3.7% vs. 0.6% previously. EUR/GBP rose on Pound concerns but gave a lot of the gains on reports that eastern European Countries would need increased IMF Funding. The EUR/USD fell 0.53% closing at 1.3939, after opening the week at 1.3990. The Japanese Yen was the major mover as USD/JPY broke through major support at 93.50 and fell quickly to 91.80. EUR/JPY crashed to multi month lows under 130 and all crosses fell sharply. Intervention talk has begun with concern about the extreme moves but analysts don't expect action until 90 Yen level on the USD/JPY. The USD/JPY closed down 3.76% at 92.54 after opening the week at 96.02. The GBP fell heavily on speculation that the Bank of England would expand their Quantitative Easing program at the meeting. The failure to do so allow the pair to recover from sub 1.6000 but the footing is fragile as heavy GBP/JPY selling capped rallies. GBP/USD fell -0.73% closing at 1.6209 after opening at 1.6328. The AUD was the worst hit currency with the recent rally favoring the commodity currency perfectly and many analysts called the move overdone. AUD/JPY fell over 6% during the week and Japanese investors are feeling the pressure and may be forced to capitulate if the move continues. The RBA met and held at 3.0% and the Unemployment rate ticked higher to 5.8% vs. 5.7% originally. The AUD/USD closed down -2.34% at 0.7785 after opening at 0.7967. The forex trading week preview In the States; On Monday, Monthly budget is forecast at -86Bn vs. +33 Bn previously. Tuesday we see advanced Retail Sales forecast at 0.4% in June. Also released June PPI forecast at 0.8% vs. 0.2% m/m. On Wednesday we have June CPI forecast at -1.6% y/y vs. -1.3% previously. Industrial Production is forecast at -0.6% in June m/m. On Thursday, Weekly Jobless claims are forecast to fall -555k vs. -565k previously. Also released Philly Fed forecast at -5 vs. -2.2 previously. We will provide our previews and reviews of these data releases in the daily summary. In the Eurozone; ECB Trichet Speaks at IFO seminar on Monday. On Tuesday, May Industrial Production is forecast at 1.3% vs. -1.9% previously. Also released, July German Zew Survey is forecast at -88 vs. -89.7% previously. On Wednesday, June CPI is forecast at -0.1% vs. 0.0% previously. In the UK; On Tuesday, June CPI is forecast at 1.8% vs. 2.2% previously. On Wednesday, Claimant Count Change forecast at 42K vs. 39.3K previously. May ILO Unemployment Rate is forecast at 7.4% vs. 7.2% previously. We will provide our previews and reviews of these data releases in the daily summary. In Japan; On Wednesday, BOJ Meeting forecast at 0.1% vs. 0.1%. The Monetary Policy Statement is also released and could provide insight into the economy. On Thursday, Tertiary Industry Activity 0.3% vs. 2.2%. We will provide our previews and reviews of these data releases in the daily summary.In Australia; On Friday, Import Prices q/q forecast at -6.0% vs. -2.8% previously. We will provide our previews and reviews of these data releases in the daily summary.TECHNICAL COMMENTARY
Currency
Sup 2
Sup 1
Spot
Res 1
Res 2
EUR/USD
1.3749
1.3827
1.3955
1.4071
1.4201
USD/JPY
90.52
91.81
92.45
94.89
95.46
GBP/USD
1.5803
1.5979
1.6190
1.6546
1.6745
AUD/USD
0.7630
0.7724
0.7800
0.8038
0.8155
XAU/USD
880.00
895.00
912.00
934.00
948.00Euro - 1.3955Initial support at 1.3827 (Jun 22 low) followed by 1.3749 (Jun 16 low). Initial resistance is now located at 1.4071 (July 1 high) followed by 1.4201 (Jun 1 high)Yen - 92.45Initial support is located at 91.81 (Jul 8 low) followed by 90.52 (76.4 retrace 87.13-101.44). Initial resistance is now at 94.89 (Jul 8 high) followed by 95.46 (Jul 7 high).Pound - 1.6190Initial support at 1.5979 (23.6% retrace of 1.3503-1.6743) followed by 1.5803 (Jun 8 low). Initial resistance is now at 1.6546 (Jul 1 high) followed by 1.6745 (Jun 30 high).Australian Dollar - 0.7800Initial support at 0.7724 (Jul 8 low) followed by the 0.7630 (May 19 low). Initial resistance is now at 0.8038 (Jul 7 high) followed by 0.8155 (Jun 30 high).Gold - 912Initial support at 895 (May 6 low) followed by 880 (May 1 low). Initial resistance is now at 934 (Jul 3 high) followed by 948 (Jun 26 high).
The Non Farm Payrolls is the most important employment indicator of the month, as it shows an indication of the employment rate and the overall strength of the labour market.
Last week's currency trading reviewThe Dollar was stronger against most currencies with the exception of the Yen with USD/JPY making a major move to the downside. The DOW fell 2.6% and Oil slid to the $60 level. ISM Non Manufacturing jumped to 47 vs. 44 previously and added to speculation that the confidence was improving. The G8 meeting took place but little new was announced. The demise of 'green shoots' rally was a major theme. July US Consumer Confidence also took a dip to 64.6 vs. 70.9 previously. The Euro fell but kept to a very pronounced range from 1.3850 to 1.4150. Reports that central banks were buying below and selling above help keep the range intact. German Industrial Production for May rose 3.7% vs. 0.6% previously. EUR/GBP rose on Pound concerns but gave a lot of the gains on reports that eastern European Countries would need increased IMF Funding. The EUR/USD fell 0.53% closing at 1.3939, after opening the week at 1.3990. The Japanese Yen was the major mover as USD/JPY broke through major support at 93.50 and fell quickly to 91.80. EUR/JPY crashed to multi month lows under 130 and all crosses fell sharply. Intervention talk has begun with concern about the extreme moves but analysts don't expect action until 90 Yen level on the USD/JPY. The USD/JPY closed down 3.76% at 92.54 after opening the week at 96.02. The GBP fell heavily on speculation that the Bank of England would expand their Quantitative Easing program at the meeting. The failure to do so allow the pair to recover from sub 1.6000 but the footing is fragile as heavy GBP/JPY selling capped rallies. GBP/USD fell -0.73% closing at 1.6209 after opening at 1.6328. The AUD was the worst hit currency with the recent rally favoring the commodity currency perfectly and many analysts called the move overdone. AUD/JPY fell over 6% during the week and Japanese investors are feeling the pressure and may be forced to capitulate if the move continues. The RBA met and held at 3.0% and the Unemployment rate ticked higher to 5.8% vs. 5.7% originally. The AUD/USD closed down -2.34% at 0.7785 after opening at 0.7967. The forex trading week preview In the States; On Monday, Monthly budget is forecast at -86Bn vs. +33 Bn previously. Tuesday we see advanced Retail Sales forecast at 0.4% in June. Also released June PPI forecast at 0.8% vs. 0.2% m/m. On Wednesday we have June CPI forecast at -1.6% y/y vs. -1.3% previously. Industrial Production is forecast at -0.6% in June m/m. On Thursday, Weekly Jobless claims are forecast to fall -555k vs. -565k previously. Also released Philly Fed forecast at -5 vs. -2.2 previously. We will provide our previews and reviews of these data releases in the daily summary. In the Eurozone; ECB Trichet Speaks at IFO seminar on Monday. On Tuesday, May Industrial Production is forecast at 1.3% vs. -1.9% previously. Also released, July German Zew Survey is forecast at -88 vs. -89.7% previously. On Wednesday, June CPI is forecast at -0.1% vs. 0.0% previously. In the UK; On Tuesday, June CPI is forecast at 1.8% vs. 2.2% previously. On Wednesday, Claimant Count Change forecast at 42K vs. 39.3K previously. May ILO Unemployment Rate is forecast at 7.4% vs. 7.2% previously. We will provide our previews and reviews of these data releases in the daily summary. In Japan; On Wednesday, BOJ Meeting forecast at 0.1% vs. 0.1%. The Monetary Policy Statement is also released and could provide insight into the economy. On Thursday, Tertiary Industry Activity 0.3% vs. 2.2%. We will provide our previews and reviews of these data releases in the daily summary.In Australia; On Friday, Import Prices q/q forecast at -6.0% vs. -2.8% previously. We will provide our previews and reviews of these data releases in the daily summary.TECHNICAL COMMENTARY
Currency
Sup 2
Sup 1
Spot
Res 1
Res 2
EUR/USD
1.3749
1.3827
1.3955
1.4071
1.4201
USD/JPY
90.52
91.81
92.45
94.89
95.46
GBP/USD
1.5803
1.5979
1.6190
1.6546
1.6745
AUD/USD
0.7630
0.7724
0.7800
0.8038
0.8155
XAU/USD
880.00
895.00
912.00
934.00
948.00Euro - 1.3955Initial support at 1.3827 (Jun 22 low) followed by 1.3749 (Jun 16 low). Initial resistance is now located at 1.4071 (July 1 high) followed by 1.4201 (Jun 1 high)Yen - 92.45Initial support is located at 91.81 (Jul 8 low) followed by 90.52 (76.4 retrace 87.13-101.44). Initial resistance is now at 94.89 (Jul 8 high) followed by 95.46 (Jul 7 high).Pound - 1.6190Initial support at 1.5979 (23.6% retrace of 1.3503-1.6743) followed by 1.5803 (Jun 8 low). Initial resistance is now at 1.6546 (Jul 1 high) followed by 1.6745 (Jun 30 high).Australian Dollar - 0.7800Initial support at 0.7724 (Jul 8 low) followed by the 0.7630 (May 19 low). Initial resistance is now at 0.8038 (Jul 7 high) followed by 0.8155 (Jun 30 high).Gold - 912Initial support at 895 (May 6 low) followed by 880 (May 1 low). Initial resistance is now at 934 (Jul 3 high) followed by 948 (Jun 26 high).
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